Rounding Errors and Jammed Calculators: League Revenues and Player Contracts

by Jacob Saltiel
Gary Bettman

Haters Gon’ Hate

After a lockout in which the usual refrain about dying franchises and sustainable business models made the rounds, why might players such as Ryan Getzlaf, Corey Perry, and Alexander Semin suddenly get huge contracts from organizations that were run conservatively in the last CBA? It’s likely that Gary Bettman, and the rest of the NHL’s front office picked up on a financial trend and took advantage of an expiring CBA to change the financial dynamic of the league to allow teams to make more and spend more money than before. As agents and general managers take advantage of or are confounded by the new CBA’s economics, the contracts awarded to the above-three players will become more commonplace. Whether they actually jam up salary caps as badly as some have speculated may not occur at all.

Nostradamus of Long Island

The purpose of the lockout was to sign a CBA that would make NHL franchises more valuable. As games were cancelled and hockey fans were treated to dramatic high tragedy unseen outside of the ancient Greek epidaurus since the first production of Clytemnestra, many wondered if the league had caused permanent damage to it’s brand. Fans posted messages about never returning and personally impugning Gary Bettman for having MacBethed them and major media sites published them.* Turns out the gang with all of the information and the fancy degrees knew more than everyone else. If there are fans stalking the streets shouting and tweeting about how they’re still boycotting the NHL in protest, they certainly can’t be found in Montreal. Rather, the league could contract to just Montreal and Columbus, the Canadiens could smash the Blue Jackets for a decade, winning the Stanley Cup every time, and Montrealers would probably still blow up a bus and smash an SAQ or seven every spring.

As Nicholas Cotsonika’s reports, the NHL had access to information about fan retention that remains private. This doesn’t mean that Bettman won’t brag about the information disparity (from Puck Daddy): “We keep metrics all the time,” Bettman said. “Rather than engage in the speculation that many do, we actually try and do some real research, and our fans have reconnected in a very big way.” Yes, he’s talking about you. He knows what you’re thinking right now. The importance of this is that the cap will be going down next year, but if Cotsonika is right, then the cap might start rising again in subsequent seasons. In fact, with new TV deals (goodbye Hockey Night in Canada!), previously penurious owners** might start making it rain on their stars.

Range Rover Sales Are Up

Which brings us right back to Getzlaf, Perry, and Semin. At beginning of this abbreviated season, it seemed a given that at least one of the two Anaheim stars would be playing elsewhere in the summer. Anaheim wasn’t known to spend huge on longterm contracts. Both wanted to get paid, and with the pessimism about declining cap numbers, it seemed like they were labeled for departure. Then a champagne monsoon struck. Getzlaf and Perry were signed in turn to maximum contracts worth more than $8m/year. They’ll each be 35 in 2021 when these contracts expire. If you’re reading this and you’re aged anywhere in your 20’s, you might have a marriage, a mortgage, and kids by the time they stop playing. Ponder that. And your mortality.

Similarly, Semin got a 5 year contract extension and a raise to $7m/year 30 games into his 1 year deal with Carolina. Where Anaheim was a cautious rather than cheap team, the Hurricanes stay away from the cap ceiling as if it were the edge of a precipice overlooking a vast abyss while their GM Jim Rutherford has some downright backwards notions about drafting defencemen.*** Unlike Getzlaf and Perry, it’s a mystery whether or not Semin is even worth the money.

Mo Money? No Problem

Something else might be at work here, and there’s a good chance that whatever Murray and Rutherford are seeing is the same thing that Nostradamus Bettman saw in preparation for the lockout. If you look at the dollar value of the contracts, it’s easy to think an avian insanity virus is gaining a foothold in NHL front offices. But then, under a cap system, the # of dollars can be misleading. What really matters is the percentage of cap space allocated to a player. Why? Well, under a cap system, all the contract of a player indicates is the maximum amount of money he can make. League revenues can increase  beyond what they were when the contract was signed, and hence the % value of that contract can decline over the life of a deal. In that sense, particularly with maximum contracts, they become more manageable as long as league revenues increase.

To take the Getz as an example, next year his $8.25/m salary will cost Murray a little less than 13% of his $64.3m in cap space. In 2005, the salary cap was set at $39m. By the end of the new agreement, it had reached $64.3m. That’s more than a 50% increase. Hypothetically, if Getzlaf had signed his contract in 2005, his % against the cap would have been an untenable 21%. By the end of the CBA, that % value would have dipped to 13%. So, the risk**** for these kinds of contracts that by the age of 35 Getzlaf might slow down and be an overpaid veteran is actually mitigated by this effect.

Sure, there’s some risk involved that the entire economic landscape in which professional sports leagues in North America operate can change. For that to happen, though, would require the booming TV content industry to stop spending money on sports coverage and for average people to suddenly stop buying cable and satellite packages and for sports bars to stop televising games and for people to stop buying tickets and buying merchandise, etc… etc…

That’s why if you’re a general manager negotiating with a homegrown player of elite quality, you can reasonably gamble on maximum contracts. A contract like Getzlaf’s hurts in the short term, but the Ducks have a variety of cheap young players on entry-level contracts filling out their roster. By the time those young players start requiring new contracts, Murray will have a better idea of which of them are worth retaining and which can be off-loaded for cheap value, such as picks or additional prospects. As the % value of contracts given to Perry and Getzlaf decline, he’ll still have flexibility to retain the next wave of quality players.

The bets that GMs will have to make in the new CBA involve giving these contracts to the right players. A 13% value contract really isn’t much of a hindrance if that’s Getzlaf in his current form collecting the pay checks. As for Semin and his 10.8% contract, well, he certainly isn’t getting paid to fight, so he’d better score a lot. As more of these contracts get signed, the mayhem will really begin when stars on these contracts begin picking up career-altering or ending injuries. Until then, enjoy the show.

Under Bettman’s leadership, it will definitely go on, and it will almost certainly turn a profit.


*But everyone agrees that they’d drink an afternoon Coors Light with Bill Daly and laugh about the old days.

**This category does not include Charles Wang, whose ownership of the Islanders makes pre-Carol Ebenezer Scrooge look like the founder of the Bill and Melinda Gates foundation.

***At a time when it’s nearly universally accepted that you can’t win without defencemen, this poorly conceived… strategy… is probably a big reason the Hurricanes blow.

****As with any guaranteed contract, the main risk is that they’ll got incapacitated or slowed by injury, but one can’t necessarily predict when the that’ll happen.


One Trackback to “Rounding Errors and Jammed Calculators: League Revenues and Player Contracts”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: